Fight over Federal Reserve powers holding up year-end deal

Bonnie Cash

A partisan fight over language that would terminate the Federal Reserve’s power to set up credit lending programs to backstop the fragile U.S. economy has emerged as a significant obstacle to getting a deal on a year-end COVID-19 relief package.

Republicans say the Fed’s authority to set up special purpose vehicles to keep money flowing through the United States economy is no longer needed and that Congress always intended to eventually end the special authority created by the CARES Act in March. 

But Democrats worry that limiting the Fed’s power could be an attempt to sabotage the incoming Biden administration’s ability to respond to an economic downturn. If Senate Republicans refuse to agree to another major fiscal relief package in 2021, they say, the Fed will need flexibility to pump money into the economy.

Senate Republican Whip John Thune (S.D.) on Thursday identified language backed by Sen. Pat Toomey (R-Pa.) to wind down Fed authority to set up credit lending facilities as a high priority for Republicans.

“I think the Federal Reserve authority — there’s a really strong interest in making sure that door is shut. That’s a big priority for a lot of our members,” Thune said.

Toomey’s proposal, which the Pennsylvania senator describes as a “consensus” position within the Senate Republican Conference, would rescind unused funding allocated in March to backstop Fed lending programs, would reiterate that the lending facilities will expire at the end of the year and ensure that the Treasury Department and Fed couldn’t create future clones of the program.

Democrats, however, are balking at the idea. They argue it would impact President-elect Joe Biden’s ability to respond to an economic crisis with an uncooperative Congress. Unless Democrats win two Senate runoff races in Georgia next month, Republicans will control the Senate in 2021. 

Sen. Chris Coons (D-Del.), a close Biden ally, called the Toomey proposal a non-starter. 

“My concern is that it would sharply limit the ability of any future administration to act in a decisive and timely way to help shore up the economy,” he said.

“If you talk to current and previous Treasury leaders about the role 13(3) has played as a tool, they would say we should not give it up,” he said, referring to the emergency lending programs set up under Section 13(3) of the Federal Reserve Act. 

Sen. Sherrod Brown (Ohio), the senior Democrat on the Banking Committee, accused Treasury Secretary Steven Mnuchin this month of trying to “sabotage” the economy by announcing his plan to end the programs and return unspent funds to the general fund, which would make it difficult for his presumed successor, Janet Yellen, Biden’s choice to head Treasury, to access them.

Mnuchin disputes that charge and says he is only trying to follow the intent of the CARES Act, which Republicans say always intended to sunset the Fed powers at year’s end. 

Democrats point out that Federal Reserve Chairman Jerome Powell earlier this month testified to the Banking panel that he wanted the facilities to be left in place.

“Our thinking is that we would have left facilities in place to be backstops. We don’t question the secretary’s decision about the CARES Act money because that’s entirely his decision to make. But I think central banks generally would have done that,” Powell said. 

Toomey’s proposal would only impact facilities that received CARES Act money, the primary market corporate credit facility, the secondary market corporate credit facility, the Main Street lending program, the municipal credit facility and the Term Asset-Backed Securities Loan Facility.

Toomey said it would prevent Democrats from “morphing” the program to fund a variety of priorities that Congress never intended it to fund. 

“It would be a terrible idea to morph these programs into something else,” he said. “We’ve heard all kinds of specific ideas from Democrats who want to for instance to use these Fed facilities to bail out states and municipalities. Fund their programs that they put into the HEROES Act,” referring to the $3.4 trillion proposal House Democrats passed in May. 

Toomey angrily denied Democrats’ claims that Republicans are trying to hamstring Biden before he takes office.

“Quite contrary to what some of my Democratic colleagues have suggested, this is not at all an effort in any way to hamstring the Biden administration or weaken our economy. That is a ridiculous notion,” he said. 

He noted that efforts to end the programs began when Republicans were participating in the drafting of the CARES Act when they pushed for an end date of Dec. 31.

One Senate Republican said Toomey is making the Fed-related language “a very bright red line.” 

Toomey told reporters Thursday it’s his top priority.

“This is the most important thing to me,” said Toomey, who would be the Senate Banking Committee chairman next year if Republicans keep their majority.

He said his goal is “maintaining the integrity of the role of the Fed, the independence of the Fed” and “preventing the Fed from being politicized” and “misused to become an allocator of credit and America’s biggest commercial bank.”

Other Democrats are raising serious concerns, however.

Sen. Bob Menendez (D-N.J.), a senior Democrat on the Banking Committee, said “I have a negative view of that.”

“I think it is spiteful to close the facility and not let the new administration be able” to use it, he said.

Sen. Brian Schatz (D-Hawaii), another Banking Committee member, called the Toomey proposal “a non-starter.”

“From the standpoint from how you deal with negotiations in good faith like a grownup, you’re just not allowed to introduce new consequential demands at the eleventh hour,” he said.

“This is new stuff as a condition for passing something,” he added. “This is not the way to get a deal done, this is the way to tank a deal.

Rep. Donna Shalala (D-Fla.) and Bharat Ramamurti, two Democratic members of the bipartisan Congressional Oversight Commission created to oversee the CARES Act, issued a statement blasting the Republican proposal.

“Senate Republicans’ proposal is radical and reckless. It limits the ability of the Biden Administration to address our current economic crisis and it undermines the Fed’s ability — not just now, but indefinitely — to respond to future financial crises,” they said.

Shalala and Ramamurti argued that Mnuchin recently said if market conditions worsened, the emergency lending facilities could always be reopened using non-CARES Act funding.

“Now Senate Republicans are trying to slash even that final safety net for the economy,” they said.

Sylvan Lane contributed. 

Tags Bob Menendez Brian Schatz Chris Coons Donna Shalala Janet Yellen Joe Biden John Thune Pat Toomey Sherrod Brown Steven Mnuchin

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